April 25. Flirting with 3% as asset values erode
–There’s a lot of attention focused on the 3% level in ten year notes, but I am still watching 2.87 as major support in fives as well. 5y auction today; w/i was 281.5 at futures settlement. Though rates were little changed by day’s end, the curve was modestly steeper, and the dollar shows continued signs of a bottom. Big trade in euro$’s yesterday (against the 3% level) was a buyer of 100k 3EM 9700/9725cs vs 9662.5p for 3 to 4 bps. EDM1 is the underlying, which settled 9694.0. High correlation to 10 year yield, for example on April 3, TYM settled 120-27 with cash yield 278.3. Yesterday, the ten year yield was exactly 20 bps higher at 298.3 (119-10+) and EDM1 was also exactly 20 bps higher at 9714.
–Another interesting trade was a seller of 3k USU 141^ (4’52s) vs +3x 146/151cs (0’40s). If same as the 143p short, he continues to add longs with open ended put exposure. The question now is whether weakness in equities will spill over into a bid for fixed income in the face of supply and deteriorating corporate credit quality. There’s a piece on BBG this morning outlining concerns: “Notes in the lowest rungs above high-yield junk — in the BBB group from S&P –total about $3 trillion.” “The high-grade bond market in the U.S. already has the lowest credit quality mix since the 1980s, according to CreditSights…”
https://www.bloomberg.com/news/articles/2018-04-25/a-3-trillion-credit-market-has-corporate-bond-investors-on-edge
–There continues to be short covering of wing calls in dollars, for example, EDM8 9812c 0.25 paid 80k (OI -42k) and 2EM 9787c 0.25 paid for 80k as well with OI down 28k. There was a block seller of 23k EDZ8/EDZ9 at 35.0 (exit). Settled at 34.0, having been as high as 36.5 early in the day. I would say that the theme is uneasiness with respect to further downside in stocks, and positions are being pared accordingly.
–One week from today is an FOMC meeting. No change in rates expected. No press conference. But there may be some clues in terms of economic slowing. Today features auctions of 2y FRN and 5y note. FB reports after the close (ruh-roh).
